Is pension income drawdown worthwhile?

Question
I do not have a SIPP at the moment but I am interested in what they offer. A lot of the press coverage has related to the freedoms afforded by flexible drawdown. However the majority of people will be restricted to capped drawdown I will almost certainly be one of these if I eventually go ahead and succumb to a SIPP.

I am unclear about how much flexibilty capped drawdoen will offer. People often suffer an income shortfall between ages 60-65 and it will be nice to take more income during this time. How does it work from year to year and how easily can changes (subject to the cap) be made?
Answer
The recently amended rules on how you can take an income from your pension have effectively scrapped the requirement to buy an annuity (i.e. swap your pension fund for an income for life) by age 75. The previous rules did technically allow this anyway, but the new rules are a bit simpler.

If you'd prefer not to buy an annuity - perhaps you think rates are currently unappealing or that you won't live long enough to get value for money - then the alternative is to leave your pension fund invested and draw a regular income instead - commonly called 'income drawdown'.

You can start drawing an income from age 55, with the option to take up to 25% of the fund as a tax-free cash lump sum at that time (generally a good idea). The income drawn can be between £0 and the amount you'd get from a single life level annuity, as calculated by the Government Actuary Department (GAD) - this is the capped drawdown you refer to. And if you want any remaining fund to buy an annuity at a later date you can.

If you receive at least £20,000 annual income for life (via state/other pensions) then you can take as much income as you want, i.e. 'uncapped' drawdown.

The only difference on reaching age 75 is that the equivalent annuity calculation (which determines the maximum income you can draw) must be carried every year - before then it's every 3 years.

Income drawdown is flexible, you can alter income payments (within the limits), although pension providers might charge an admin fee for doing so. But unless you have sufficient income to make uncapped withdrawals, you'll be limited to the equivalent annuity so not very helpful if you want to withdraw a lot of income for a few years (e.g. between 60-65).

Whether or not you use a SIPP in conjunction with drawdown is less relevant. SIPPs are popular for this purpose because income drawdown only tends to be worthwhile on larger pension funds (drawdown usually incurs some extra fixed charges and requires more effort/advice). And if you have a larger pension fund you'll probably be attracted to the investment choice offered by SIPPs. But income drawdown is available via more humble pensions too.

Another motivation for leaving a pension invested might be to pass it onto your spouse or offspring (assuming you're wealthy enough not too need it yourself). However, unless it's used to provide a taxable income for dependents, the fund will be taxed at 55% when paid out.

Read this Q and A at http://www.candidmoney.com/questions/question519.aspx

First time buyer mortgage with large deposit?

Question
Where can I find information on a range of mortgages that cover the situation where a large cash deposit input comes from parents?

What are the options for this type of mortgage, i.e. shared ownership? loan to young couple etc.Answer
If you and your partner have sufficient income to borrow the remaining amount required (lenders usually allow up to three times your combined annual salaries) then it's simply a case of shopping around for the best mortgage deal you can find.

Because the deposit gifted by your parents means the amount you need to borrow is likely fairly small compared to the value of the property (called the 'loan to value' (LTV) ratio) then you should have pretty much the whole mortgage market open to you - some of the best deals are only available to those wanting to borrow smaller amounts relative to the purchase price (i.e. lower LTVs).

Good sources for finding the current 'best buys' available are comparison sites like Moneyfacts and Moneynet.

Your main decision will be whether to opt for a variable or fixed rate. There's no right or wrong, the decision really depends on the extent you could afford higher monthly payments if interest rates rise. However, as fixed rates are currently higher than good variable deals you'll pay a premium to effectively insure against rate rises over the next few years which, in the current climate, don't look that likely. And, if you want to repay the mortgage during the fixed period (e.g. you decide to switch to a variable rate) there's usually a penalty for doing so.

If you go the variable route consider discounted rate deals which usually reduce the interest rate for the first 2-3 years. Provided you can repay the mortgage without penalty when the offer ends (i.e. re-mortgage to find a better deal elsewhere) then there's little downside. Or, take a look at 'tracker' mortgages, which usually fix your interest rate a set amount above the Bank of England Base Rate, ensuring you should get a fairly competitive deal over the life of the mortgage (potentially avoiding the hassle of re-mortgaging in future).

To give some examples, the following deals are as at the time of writing:

Fixed:Yorkshire BS (75% LTV) 3.99% fixed for 5 years.

Discounted Variable: Leek United BS (75% LTV) 2.49% discounted for1st 2 years (no penalty to repay thereafter)

Tracker: HSBC (60% LTV) 2.59% (base rate + 2.09% for life of mortgage).

There may be extra charges in addition (e.g. application fees etc) but the above should give you a general feel for how rates currently stack up.

You might see 'first time buyer' mortgages advertised, these are probably less relevant for you given your high deposit - the rates tend to high as they offer more generous LTVs than usual.

Shared ownership mortgages are relevant if you're unable to borrow sufficient money to buy a property outright. Some housing associations offer homes whereby you buy a share in the property (usually up to 75%) and pay a low rent on the balance, which is owned by the housing association. There's usually the option to buy the remaining share in future.
You may find it helpful to get quotes from a couple of independent mortgage brokers. You should be under no obligation to use them and hey can provide advice specific to your situation.

Finally, stating the obvious, be really careful not to over commit yourselves by borrowing more than you can realistically afford. No point buying a lovely home if it becomes a millstone or gets repossessed.

Good luck house hunting!

Read this Q and A at http://www.candidmoney.com/questions/question516.aspx

Are shares a good idea for ordinary investors?

Question
Are individual equities (including Investment trusts and Exchange Traded Products ) suitable for ordinary investors in general ? I ask this in relation to the risks and costs involved.Answer
Yes, provided they understand and are comfortable with the nature of the investments and inherent added risk versus a comparable unit trust.

In general terms, the additional risks due to the structure of investment trusts and ETFs are as follows:

Investment trusts
- investment trust shares often trade at a different price to the market value of the underlying investments (called 'net asset value' - the equivalent of unit trust unit price). For example, if an investment trust is trading below its net asset value (most do) it's said to be trading at a discount. If the discount widens then you could lose money even if the underlying investments haven't fallen in value (and, of course, vice-versa).

- investment trusts can borrow money to invest, called 'gearing', the average currently being about 9%. This means if you invest £100 the investment trust might borrow another £9 to give you £109 of market exposure. Good if markets rise, but it'll increase losses if markets fall.

ETFs
- if the ETF is 'synthetic', i.e. rather than buying shares the fund arranges for an investment bank to pay the promised return, then you might lose money if the investment bank(s) concerned doesn't pay up as promised. This is called 'counterparty risk'.

- if the ETF lends stocks to someone else (a common practice for many funds, not just ETFs) and the other party doesn't give them back, you might lose money - another form of counterparty risk.

See my article here for a more in depth explanation of these risks.

Shares are theoretically more risky because your investment depends on the fortunes of just one company, whereas a fund might hold 50 or more companies, helping to spread risk. But investing via shares is also cheap, as you don't need to pay a fund manager. I think this route is fine provided you do some research, appreciate the risks and are confident picking more winners than losers, as in a worst case scenario your investment could be wiped out if the company goes bust.

The other thing to consider is that neither shares, investment trusts nor ETFs are covered by the Financial Services Compensation Scheme (FSCS).

On balance I think both investment trusts and ETFs can both be well worthwhile, depending of course on the exact fund you select. Because neither product pays either sales commissions nor platform fees then charges tend to low, especially so for ETFs which are usually tracker funds (so there's no expensive fund manager to pay). I don't think buying shares directly is for everyone, but it's a route that some investors have used with great success.

Read this Q and A at http://www.candidmoney.com/questions/question518.aspx

Is Just Retirement safe?

Question
What do you think of "Just Retirement" as an annuity provider? I am nervous about using one which is not a big insurer. Are they covered by the FSCS?Answer
Just Retirement certainly can't compete with the large insurers when it comes to size, but they seem to have carved a niche for themselves in the 'enhanced' annuities marketplace - i.e. where your health or lifestyle might shorten your life expectancy. They also seem to do brisk trade in equity release mortgages and are no minnow, making an operating profit of £121 million last year.

If Just Retirement can offer you a competitive annuity rate then I'd be fairly relaxed about using them. It's not out of the question that they'd go bust, but I think it's unlikely. My biggest reservation is that the business is funded by venture capitalists, who might be reticent to pump money into the business to try and save it if things did go wrong.

In any case, Just Retirement annuities are covered by the Financial Services Compensation Scheme (FSCS), so you should get some protection if they did go bust. In such an instance the FSCS would probably look to transfer the annuity to another provider on the same terms, in which case you should notice little difference except for a possible delay in receiving income will the process take place.

Otherwise you’d claim for the equivalent lump-sum value of your annuity based on the cost of a new policy to provide the same level of income and benefits (such as joint life cover and indexation). You would then expect to receive 90% of this value with which to purchase a new pension annuity.

Of course, FSCS rules and levels of cover could change in future, but I think it’s unlikely cover for annuities would fall.

Read this Q and A at http://www.candidmoney.com/questions/question515.aspx

Should we fight high fund charges?

When most of us want to earn more money we have to work harder or more productively. And in these austere times even that might not work. But for fund managers it’s a lot easier, they just hike their fees - usually with little justification..

I first covered this topic on the site a year ago, but a couple of announcements this week have promoted a re-visit.

There are plenty of past examples where fund managers have raised fees for no other reason than it makes them more money.

The most obvious that springs to mind is Invesco Perpetual raising the annual charge on several funds, including Neil Woodford’s High Income fund, from 1.25% to 1.50% in June 2004 - boosting revenue by over £13 million a year since then. Their argument for doing so at the time? I seem to remember it was something like "well, most others charge 1.5%, so we're 'harmonising' our charges with the market." I'd better not print what I thought of this at the time, but let's just say 4 letters would suffice...

Moving swiftly on, Henderson and Standard Life Investments have both announced fee increases this week that prompt me to use those same 4 letters. Standard Life Investments, who deserve much credit for turning a lacklustre insurance company arm into a decent investment house, will be raising the annual management charge on 7 of its funds. The highest profile of these is the £1.2 billion UK Smaller Companies fund run by Harry Nimmo, which will see the annual charge rise from 1.5% to 1.6%. In total I reckon these increases will make Standard Life Investments an extra £2.3 million a year based on current fund sizes.

Their reason for doing so? The official quote is 'At Standard Life we conduct regular reviews of our products to ensure our fund charges remain competitive with the market...'. So hiking charges makes them more competitive? Standard Life is obviously on another planet to the rest of us!

Not to be outdone, fund giant Henderson, which recently bought Gartmore, has said fund administration charges (i.e. those charges on top of the annual management charge which make up the total expense ratio (TER)) on Gartmore funds will be brought in line with Henderson funds. The upshot is that the majority of Gartmore funds will see their TERs rise, by as much as 0.1% or more. I've yet to see the exact changes, by I wouldn't be surprised if they end up costing investors an extra £4m or more a year.

Quite how running more funds increases costs is beyond me, hasn't Henderson heard of economies of scale?

And then there's performance fees

If you buy an absolute return fund, chances are the manager will charge you the standard 1.5% a year plus a performance fee, in some cases 20% of all positive returns. So if the manager does a bad job they take home the usual fee and if they do an ok or good job it'll be a lot more.

Performance fees are fine where they ensure the manager shares risk with investors, i.e. their income is higher than usual if they do well and less than usual if they perform poorly. But fund managers don't seem to like doing anything that risks them earning less money. A few years ago (when at Bestinvest) I did try persuading a few fund groups to introduce fair performance fees along these lines, I'd have stood a greater chance of raising the dead.

It's obvious the concept of fairness is lost on most of the fund management industry and that they only care about one group of people - themselves.

What should we, as customers, do?

My gut answer is boycott greedy managers who don't treat customers fairly. But in practice, it's not that simple.

I still hold Invesco Perpetual High Income, despite my disgust at the fee increase mentioned above. Why? because I believe Neil Woodford will make me more money long term than a tracker fund. I also hold Standard Life Investments UK Smaller Companies. I'm sorely tempted to sell in protest, but Harry Nimmo is a great manager who's probably worth 1.6% a year if he continues outperforming his peers.

The trouble is, unless we stand up to fund managers by moving money elsewhere when they hike charges or introduce greedy performance fees, they'll continue to walk all over us.

So what is the answer? Should consumers try to band together and regain some power over fund groups? Or should we all focus on bottom line returns and be relaxed about charges? Please share your thoughts below...

Read this article at http://www.candidmoney.com/articles/article236.aspx

Should I invest in emerging markets?

Question
I am currently new to investing and was wanting to know your thoughts on the Jupiter China Fund and the Jupiter emerging market funds?

I am looking at starting small by investing £100 per month into a profitable fund. Are there any funds that you could recommend to me?

Many thanks in advance for your advice.Answer
The answer really depends on how much risk you're comfortable taking. This will determine the investment areas that are potentially appropriate, then it's a case of choosing funds in those areas that are (hopefully) worthwhile.

I've little doubt that China and other emerging markets are a good bet over the next 10-20+ years. Their economies will likely continue to grow at a faster rate than ours and there should be good profits to be made along the way, especially as their local populations start to earn then spend more money. From this point of view you could argue investing in these areas is fairly low risk long term.

However, the shorter term risks of investing in these areas can be high. When there are global setbacks, the investments that have tended to rise fastest often fall back the hardest - as has generally happened with emerging markets over the last year. And there's plenty of factors that could push emerging economies off track as they grow - high inflation, political problems, corruption, banking crisis and natural disasters to name but a few. You might find my article on emerging markets helpful.

While none of these potential problems are ever likely to be terminal, they can contribute to emerging markets investing being a volatile journey, so you'll need to be comfortable facing potential losses at times along the road to probable long term profit.

Of course, you might be lucky and make lots of money within just a year or two, but I'd strongly suggest only investing in emerging markets if you're comfortable with the possibility of high short term volatility and losses. Investing monthly does potentially help, as short term market falls will hurt less than had you invested a large lump sum at the outset.

If the above doesn't put you off then by all means consider a China and/or emerging markets fund. If you think this approach will give you sleepless nights then perhaps consider spreading your money more widely, perhaps including some developed markets and maybe other investment types such as fixed interest and property.

As for the Jupiter funds, I'd be inclined to look elsewhere. Jupiter China has disappointed of late (see my answer to this earlier question) and Jupiter Global Emerging Markets has only been running since November 2010, so little track record as yet. The manager, Kathryn Langridge, has run emerging markets funds for other fund providers in the past, but with less than convincing results.

That's not to say neither will do well in future, but fund investing is all about making educated guesses on how things will pan out. And on balance I think there's a reasonable chance you'll end up better off using funds like Aberdeen Emerging Markets or First State Global Emerging Markets Leaders for emerging markets exposure - both have proven management teams and tend to be relatively cautious (which I think is no bad thing). As for China funds, First State Greater China Growth is worth a look, as is Neptune China (although it's run more aggressively hence volatility is likely to be greater).

The alternative to the above actively managed funds is to buy funds that aim to track an index. These should be cheaper and quite often fare well versus a number of active funds. There's not a great choice when it comes to emerging markets - you'll need to consider exchange traded funds, which might become expensive for a monthly saving due to dealing costs, although some stock brokers (iii and Alliance Trust Savings) do offer monthly dealing for £1.50. But if you decide to invest in developed markets (e.g. UK or US) then they're well worth considering.

Holding funds from different fund managers is easy if you use a fund platform/supermarket and you can cut costs by doing this via a discount brokers. Take a look at the Candid Guides on these topics for more info.

Good luck whatever you decide.

Read this Q and A at http://www.candidmoney.com/questions/question514.aspx

Are nominee accounts safe?

Question
I've been a regular investor using Halifax Sharebuilder ( because it's £1.50 per trade ) and so hold shares in their Halifax Share Dealing Nominee account. From your excellent website I recently found out that I am merely the beneficial owner of the shares, and 'Halifax' is the legal owner of them.

That prompted me to find out what happens if the organisations, that I have nominee accounts with, suffer financial problems and have received satisfactory ( or excellent! ) replies from them all - except Halifax who keep telling me that the compensation limit is £50k.

Can you get a better answer out of them - or is it actually unsafe to hold more than £50k with them? ( it would seem odd to advertise cheap dealing rates if there was any sort of chance that you could lose your holding totally, so I'm expecting a sensible answer to come forth eventually, but this 'ordinary consumer' has failed to get it so far )

PS. Their standard reply begins with "As a subsidiary of Lloyds Banking Group we are a part of the UK's biggest savings and mortgage provider which has a strong capital base and as such you can be confident that you are dealing with a sound business." which is enough to scare anyone!Answer
Stock broker nominee accounts all operate in a similar way. The shares will be registered in their name (well, technically the nominee account's name), but held for your benefit via the nominee account.

This means your name won't appear on the shareholder register and you won't usually be eligible to either vote or receive any shareholder 'perks' (less common these days anyway). But you should still expect your money to be safe (ignoring the risks of the underlying shares themselves).

Nominee accounts should always be ring-fenced from a stockbroker's own business. This means that if the broker goes bust the nominee account is unaffected. It might take a while to get the shares re-registered into your name (or another stockbroker's nominee account), but the important point is that your shares are safe.

However, there's a risk the stockbroker might dip their hands (illegally) into the nominee account (think Robert Maxwell and pensions...). While this is highly unlikely, especially for a large well established broker, I guess we can never say never.

If this does happen and the stockbroker goes bust (meaning they can't afford to reimburse the nominee account) then the Financial Services Compensation Scheme (FSCS) should kick in, but this only provides compensation for up to £50,000 of investments held per firm.

Bottom line, if you hold shares via a nominee account and don't trust your stockbroker not to illegally take your money, then limit your holding to £50,000.

A more secure way of holding shares is to use a Crest 'Personal Account', which allows electronic share trading but ensures you are the registered owner of the shares. The downside is that few stockbrokers currently offer this facility and it seems to be more expensive than conventional nominee accounts.

Halifax certainly haven't been very helpful in their answer to you. But I've checked and they operate a standard nominee account (Halifax Nominees Limited) as outlined above.

Read this Q and A at http://www.candidmoney.com/questions/question512.aspx